Policy Limits Provisionally Pro-rated Before All Claims Finalized

A Superior Court decision released this afternoon deals with a recurring problem in the field of liability insurance: where the total claims greatly exceed the policy limits, can one claimant settle and obtain payment of the entire amount of his or her damages, before the competing claims have yet been assessed?

The case is Behrns v. Burleigh et al. and was decided by Justice David Corbett. There were two competing groups of claimants, both of whom had sued after a serious motor vehicle accident. One plaintiff, Randall Middleton, was only three months old at the time and suffered a serious head injury. His mother was killed. The damages in this case have not yet been assessed, largely because it has been difficult to determine what the long-term outlook will be for young Randall. However, his counsel led evidence (albeit from a lawyer in the same firm), that that claim will eventually be assessed at betweeen $1 million and $3 million.

The other injured party was Julie Behrns, a passenger in a second car. Her injuries were described by Corbett J. as “serious and life-altering”. Her counsel settled her claim with the defendant’s insurer, for $317,500. In this proceeding, Behrns was seeking payment of the settlement amount from the insurer.

The at-fault defendant had liability insurance limits of only $1 million.  The issue for Justice Corbett was whether Behrns, who was “first past the post” by having settled her claim, was entitled to be paid out of the $1 million insurance limits? Or would payment of her claim have to await trial of the Middleton claims?

a href=”http://www.e-laws.gov.on.ca/DBLaws/Statutes/English/90i08_e.htm#BK126″ mce_href=”http://www.e-laws.gov.on.ca/DBLaws/Statutes/English/90i08_e.htm#BK126″ target=”_blank”>Section 133(3) of the Insurance Act allows a court to apportion payment where there are “several persons interested in the insurance money”.

Justice Corbett adopted a compromise solution. He felt that it would be unfair to pay Behrns in full, just because she had settled her claim first. But on the other hand, he agreed that she should not have to wait until the conclusion of the Middleton case, to receive any payment at all.

Corbett J. noted that the Middleton plaintiffs had only claimed damages of $2.25 million. He acknowledged that a party can generally amend pleadings at any time but said that “until he does so he is bound by them”. Accordingly, Justice Corbett made a provisional apportionment based on an assessment of $2.25 million for the Middleton claimants and the agreed-upon amount of $317,500 for Behrns. Once the amount of the Middleton claims had been established at trial (scheduled to be held next year), Behrns would be able to seek an adjustment, should her pro rata share of the policy limits turn out to be more than the allotment given to her in the provisional apportionment. But she would not have to repay any of the money, regardless of the outcome of the Middleton trial.

Justice Corbett referred to the dearth of caselaw that had addressed the “first past the post” issue, involving insufficient insurance limits. He referred to Solway v. Lloyd’s, [2005] I.L.R. 4400, 22 C.C.L.I. (4th) 138, 75 O.R. (3d) 129 (Ont. Sup. Ct.), where the “first past the post” argument succeeded, with the first claimant being paid in full. However, the second claimant there had apparently been quite lax and had done little to move the claim forward. Justice Corbett felt that the Solway case was distinguishable on that basis. It was also not clear in Solway, that the limits would be insufficient to pay all of the claims.

The danger to an insurer of settling with one claimant to the exclusion of others is illustrated in a series of cases from British Columbia. The leading case there, on this issue, is Bartkow v. Merit Insurance Co., [1962] I.L.R. 1-068 (B.C.C.A.). It dealt with the equivalent of s. 258(1) of the Ontario Insurance Act, which allows a claimant who has recovered judgment against an insured, to pursue a claim directly against that person’s insurer, for payment of the judgment. The British Columbia Court of Appeal held that “the rights of persons entitled under [the B.C. equivalent of s. 258(1) in Ontario] cannot be defeated or limited by an insurer who chooses to make private settlements with other claimants against the insured”. There, the insurer had not only settled with but had paid the first group of claimants, to the prejudice of the second. The B.C. Court of Appeal held that the insurer was liable to the second claimants for the full amount of their judgment, even though this meant that the total payments by the insurer exceeded its policy limits. It was obviously that outcome that the insurer in today’s case wished to avoid.

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